Market Perspectives July 20, 2017

1. Chicago Board of Trade Market News

Week in Review

Outlook: What goes up must come down – and then go back up? Corn futures were rising fast before last week’s bearish WASDE sent the market into selloff-mode for two days. After chasing out nearly all the corn bulls, drier weather forecasts sent the market higher again this week. Last Thursday, December corn futures were down 19 cents for the week. Today, prices are 20 cents higher than last week. The volatility is almost entirely due to the weather and different models’ divergent forecasts. 

The two primary weather models used by traders, the EU and NOAA’s GFS models, have shown different results for much of the past week. In general, the GFS model has trended cooler and wetter while the EU has shown more limited rainfall and hotter temperatures. The EU model has been slightly more accurate so far this year, though both have proven extremely useful. The corn market’s direction has largely depended on which model was updated the most recently. The market tends to rise when the EU shows hotter and drier predictions and tends to fall when the GFS model is less bullish. Because the GFS model has been slightly less reliable this year, traders are beginning to focus on EU model runs. These are showing more hot and dry weather, which matches what crop scouts are seeing in IA, IL, and IN – that the crops need rain! 

USDA’s current yield projection for the U.S. corn crop is 170.7 bushels per acre. Nearly all analysts view this figure as too optimistic given the hotter- and drier-than-normal weather observed so far. Crop genetics have vastly improved over the decades but corn still needs water and cooler night temperature to do well. Current yield projections are near 165 bushels per acre, which – leaving all other factors in the U.S. supply and demand sheet alone – would reduce ending stocks to 1.848 billion bushels, 478 million less than USDA’s current figure. 

USDA’s latest Export Sales report was bullish corn. The report showed 18.4 million bushels sold from old crop supplies and 8.3 million from the yet-to-be-harvested new crop. Old crop sales were above the 3.8 million needed in this week’s report. Similarly, weekly shipments of 41 million bushels were above the 39.7 million needed to reach USDA’s 2.225-billion-bushel export projection. YTD corn export bookings are only 11 million bushels shy of USDA’s export projection with over a month left in the marketing year. If the 17 percent YTD increase continues, the U.S. corn export program for 2016/17 could reach 2.308 billion bushels, 83 million more than USDA’s projections. 

From a technical perspective, December corn has bullish upside. Momentum indicators including the MACD and stochastic oscillators are showing a short-run upward move. Moving averages are starting to pull to the upside but are not showing great predictive power right now. Support and resistance points will be key going forward. The July 11 high of $4.17 ¼ stands as major resistance for bulls but, if broken, would usher in a try of the June 8, 2016 (over one year ago) high of $4.22 ¾. On the downside, support exists as $3.82, $3.80, and major support at $3.74. 

Looking forward, corn futures will continue to be highly responsive to weather forecast updates. For now, forecasts look hot and dry and Chicago traders will continue to add a weather premium to the market.

2. CBOT Corn Futures

CBOT December Corn Futures

CBOT Corn Futures Graph

Current Market Values:

Futures Price Performance

3. U.S. Weather/Crop Progress

U.S. Crop Condition

U.S. Drought Monitor Weather Forecast: In the two days since the Tuesday morning cutoff time of this week’s USDM, additional frontal storms have moved across the northern and central Plains, and monsoon showers and thunderstorms have brought additional rain to parts of the Southwest. For July 20-24, 1 to locally 4 inches of rain is forecast for the Four Corners States and from the eastern Dakotas to the Northeast, and half an inch to an inch is predicted for the central to northern Plains and most of the country along and east of the Mississippi River. Areas expecting little to no rain include much of the West from California to central Montana, most of Texas, and parts of the western Carolinas. Temperatures are forecast to be above normal for most of the CONUS. Little relief from the heat can be expected as above-normal temperatures are in the outlook for most of the CONUS for July 25-August 2, with only the Northeast and parts of the coastal Northwest maybe having cooler-than-normal temperatures. Odds favor below-normal precipitation for the Pacific Northwest to northern Rockies, and most of the Plains into the Midwest. Above-normal monsoon precipitation is likely to continue for the Southwest. The Northeast may start out drier than normal, then turn wetter than normal. 

Follow this link to view current U.S. and international weather patterns and future outlook: Weather and Crop Bulletin.

4. U.S. Export Statistics

US Export Sales and Exports
US Export Inspections
USDA Grain Inspections for Export

Corn: Net sales of 466,500 MT for 2016/2017 were up noticeably from the previous week and 63 percent from the prior 4-week average. Increases were reported for Japan (263,100 MT, including 89,500 MT switched from unknown destinations and decreases of 16,600 MT), Mexico (209,000 MT), Peru (52,900 MT, including 44,500 MT switched from unknown destinations), Colombia (29,100 MT), and Venezuela (23,500 MT). Reductions were reported for unknown destinations (186,700 MT), Egypt (14,600 MT), and El Salvador (12,200 MT). For 2017/2018, net sales of 212,100 MT were reported primarily for Mexico (64,000 MT), unknown destinations (50,800 MT), and Colombia (48,000 MT). Exports of 1,041,900 MT were up 18 percent from the previous week, but down 1 percent from the prior 4-week average. The primary destinations were Mexico (354,100 MT), Japan (300,600 MT), Peru (79,900 MT), South Korea (63,500 MT), and Costa Rica (62,500 MT). 

Optional Origin Sales: The current optional origin outstanding balance for 2016/2017 of 122,000 MT is for South Korea (68,000 MT) and unknown destinations (54,000 MT). The current outstanding balance for 2017/2018 of 112,000 MT is for unknown destinations. 

Barley: Net sales of 5,500 MT for 2017/2018--a marketing-year high--were up noticeably from the previous and from the prior 4-week average. Increases were reported for Japan. Exports of 200 MT were reported to Taiwan. 

Sorghum: Net sales of 57,000 MT for 2016/2017 were reported for China. For 2017/2018, net sales of 66,000 MT were reported for unknown destinations. Exports of 59,200 MT were down 43 percent from the previous week and 8 percent from the prior 4-week average. The destinations were China (58,300 MT) and Mexico (900 MT). 

 

6. Distillers Dried Grains with Solubles (DDGS)

DDGS Comments: Traders are noting greater pricing strength following corn and soybean futures’ move higher. Strong river/barge values have caused DDGS prices to bounce back to near-term highs. Prices for DDGS barge CIF NOLA rose $6/MT this week to $162 while FOB NOLA prices hit $175/MT. DDGS prices FOB ethanol plants are steady this week, averaging $108/short ton. 

Domestically, DDGS are priced at 35 percent of KC soybean meal and 90 percent of cash corn. DDGS hold a $2.21 per-protein unit cost advantage to soybean meal, less than last week but in-line with values seen two weeks ago. On the export market, FOB Gulf DDGS are priced at 103 percent of FOB NOLA corn and 48 percent of FOB Gulf soybean meal. The per-protein unit cost between DDGS and soybean meal favors DDGS by $0.68 this week, nearly double last week’s recorded value. 

Merchandisers are reporting higher prices are keeping international buyers sidelined for the time being. Container demand is weak and overseas buyers are making inquiries but are too far below domestic offers for trades to be completed. Should the CBOT rally continue, however, international buyers will be forced to increase bids and DDGS prices should have upward potential. Prices for 40-foot containers to SE Asia were lightly traded but quoted $2/MT higher at $192.10 this week.

 

7. Country News

Brazil: Ethanol prices rose based on an expected hike in the gasoline tax. An increase in the CIDE tax would take 90 days to become effective and would impact gasoline only, but the PIS/Cofins tax could be increased immediately and would impact both gasoline and ethanol. 

Separately, China’s CITIC AgriFund bought Dow’s Brazilian corn seed operation for $1.1 billion. The sale was required by Brazilian antitrust regulators as a condition for Dow’s merger with DuPont. (Platts; Reuters) 

China: Supply – the July 2017 China Agricultural Supply and Demand Estimates (CASDE) slightly raised expected corn yields and overall production while boosting its estimate of soybean imports. It lowered expected 2016/17 corn imports to 800 KMT from the earlier estimate of 1 MMT. The expected 2017/18 corn area was reduced due to a faster-than-expected decline in summer corn planting in Hebei, Shandong and Henan Provinces. 

Reserve Corn Sales – the National Grain Trade Center reports that 2.6 MMT of 2014 crop corn was sold from state reserves on July 14. That is 87 percent of the amount offered and it sold at an average price of 1,492 yuan/MT ($220.51). On July 20, it sold 54,115 MT of 2013 corn (9.14 percent of offering) at 1,250 yuan/MT ($184.80) plus 867,667 MT of 2014 corn (88.35 percent of offering) at 1,442 yuan/MT ($213.18). 

GMO’s – the government approved two new GMO corn events for importation. The approvals are part of a bilateral agreement with the U.S. to speed up approvals. Meanwhile, some companies are asking that the process of approval be made more transparent and science-based. (Reuters) 

Indonesia: The Ministry of Energy and Mineral Resources reports that it would implement fuel ethanol production incentives, but it lacks the financial resources. Indonesia will produce 205 million liters of nonfuel ethanol from molasses in 2017 and 2018 but has not produced fuel ethanol since 2010. (Ethanol Producer Magazine) 

Mexico: The white corn market in Mexico has been showing quite a bit of activity lately. Offers are currently at $234/MT and recent shipments have been reported from West Coast Mexico to Kenya and Venezuela. 

South Sudan: Army worms have infested 25 percent of the arable crop land and are destroying corn and sorghum plants. The FAO says that half the population is at risk of starvation. Now that the caterpillar has arrived, it is here to stay and could now spread to the Mediterranean and into Asia. (Bloomberg)

8. Ocean Freight Markets and Spread

Bulk Freight Indices for HSS

9. Ocean Freight Comments

Transportation and Export Report: Jay O’Neil, O’Neil Commodity Consulting: The Baltic Index traders have now been able to maintain a two-week market rally; nothing too big, but a rally all the same. The Baltic Indexes represent what is being traded on quarterly time charter rates. Just because someone is willing to pay up for a six-month or one-year time charter on a vessel, this does not mean that that buyer can immediately turn around and start getting much better voyage charter rates for their investment. Physical markets are usually slower to react. Most of this week market improvement was felt in the East Coast-South America routes. Rates in the Pacific seem to be toppy today.

Baltic-Panamax Dry Bulk Indices
Below is a recent history of freight values for Capesize vessels of iron ore from Western Australia to China:
Capesize Vessel Pricing
US-Asia Market Spreads

The charts below represent YTD 2017 versus 2016 annual totals for container shipments to Vietnam.

Container Shipments 1
Container Shipments 2
Freight Chart 1
Freight Chart 2
Freight Chart 3

10. Interest Rates

Interest Rates